Client Alert
STB Decision to Discontinue its Review of HDF Index Fuel Surcharges Increases the Urgency to Reform the Agency’s Rate Reasonableness Rules

September 6, 2019

On August 29, 2019, the Surface Transportation Board issued a decision that further heightens the need for rail shippers to press the Board for revisions to the agency’s regulations and policies that test the reasonableness of rates paid by rail shippers captive to a single railroad for service.  All three of the current Board members have stated the agency’s current methodologies are not sufficiently accessible or useful to the vast majority of captive rail shippers.  Nevertheless, the August 29 decision revealed that a majority of the Board’s three members believes the reasonableness of a railroad “fuel surcharge” - even one that can be independently shown to be a profit center because it provides the railroad with revenues that exceed its actual fuel costs - may be legally challenged only pursuant to a formal complaint that also challenges the reasonableness of the line-haul rate using one of the Board’s rate reasonableness methodologies.  The decision was silent on whether rail shippers that cannot be considered captive to a single railroad for service who are assessed an identical fuel surcharge could challenge its reasonableness at the STB, but the logic of the majority leads to the conclusion that they cannot.

The decision discontinued Docket No. EP 661 (Sub-No. 2), Rail Fuel Surcharges (Safe Harbor), a proceeding started in 2014 after Cargill, Incorporated demonstrated to the Board in a separate complaint proceeding that revenues generated from the “fuel surcharge” assessed Cargill’s traffic by BNSF Railway calculated using the so-called Highway Diesel Fuel Index (“HDF Index”) exceeded BNSF’s actual fuel costs by over $181 million over a five year period.  Although the overcharge was proven by Cargill’s evidence, even as modified by the Board, the agency nevertheless held BNSF was not required to refund any of the overcharges because the agency had previously determined in a 2007 proceeding that the HDF Index was a “safe harbor provision” railroads could utilize if they assessed a “fuel surcharge.” 

The Board made this determination even though it concluded in the Cargill case that “it has become apparent from this first fuel surcharge case to go forward that the safe harbor provision provides rail carriers with an unintended advantage,” specifically, if a carrier’s fuel costs increased above the HDF Index it could simply adjust the surcharge upwards, but if its actual fuel costs decreased below the HDF Index, the “safe harbor” would provide a floor, leading to the over recovery of fuel costs.

Although it did not find for Cargill in its case, the Board nevertheless opened the EP 661 (Sub-No. 2) proceeding to take public comments on whether the HDF Index “safe harbor” should be eliminated because of the findings as to BNSF’s version and the recognized “advantage.”  The Board received 15 comments and 10 replies from trade associations, individual rail shippers, and railroads.  However, the proceeding then languished at the agency for the next five years, eventually prompting one trade association to take the unusual step of seeking a writ of mandamus from the Court of Appeals for the District of Columbia Circuit directing the STB to take action in the proceeding.  

In the August 29 decision, which was issued while the court action was pending, the Board stated it had been unable to reach a majority decision on what additional action it should take in response to the comments in EP 661 (Sub – No. 2), and so it unanimously agreed to discontinue the proceeding.  Each current Board member summarized their respective views in separate comments to the decision.  Chairman Begeman expressed her belief that the HDF Index “safe harbor” provision “should be eliminated.”  Vice Chairman Fuchs stated his view that the STB cannot separate out fuel surcharges from the rates, in part because to do so would “make it easier, in effect, for a complainant to receive relief on its fuel surcharge.”  Finally, Board member Oberman concurred with Vice Chairman Fuchs that a fuel surcharge may only be challenged in a proceeding that also challenges the base transportation rate.   Neither Fuchs nor Oberman addressed the legal rules that would apply outside of the rate case realm.

In discontinuing the EP 661 (Sub – No. 2) proceeding, the STB has permitted HDF Index fuel surcharge formulas assessed to the vast majority of Class I railroad customers to remain in place despite strong evidence that the formulas produce revenues that exceed their actual cost of fuel.   A majority of the current Board has also made it clear that, pending the addition of two other Board members that might feel differently, captive shippers may now only challenge the reasonableness of any fuel surcharge if they file a formal complaint that also challenges the transportation rate to which the surcharge applies.  As stated above, this decision heightens the urgency for the STB to propose and finalize promised changes to its rate reasonableness rules and policies.

As for all other shippers who are assessed fuel surcharges but cannot demonstrate they are captive, the decision is silent as to their options, perhaps presuming – erroneously – that sufficient competition is present in the rail industry to cause such provisions to be modified or eliminated in arm’s length negotiations, as they were previously in the rail industry, and are now in other industries where competitors check each other’s efforts to establish prices that are too far in excess of their actual costs.   This highlights the need for rail shippers to help educate the current STB and Congressional representatives about the lack of effective rail-to-rail competition and how it adversely affects individual rail customers and the overall economy.

Procedurally, parties may ask the Board to reconsider its decision or seek judicial review of it.  However, reconsideration petitions are rarely granted and the courts afford the Board substantial deference.

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